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Time to look beyond productivity drive to greater innovation

Look beyond productivity drive to greater innovation

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The prospect of global economic instability loomed largest as a threat for businesses in Singapore. This was closely followed by concerns around rising rental and labour costs amidst a tight labour market and increasing business regulations.

These were the main concerns of businesses in KPMG’s pre-Budget 2015 poll of 203 respondents representing SMEs, large Singapore and multinational companies. The poll report is supported by the Association of Small and Medium Enterprises (ASME), CPA Australia and the Singapore International Chamber of Commerce (SICC).

The key findings of the poll report are:

48 percent cite the global economic instability as posing a threat to their businesses. Among large Singapore and multinational businesses, 57 percent see the global economic uncertainties as the key structural issue over the next 12 months.

41 percent cite rising rental and labour costs as a top operational concern. Only 10 percent of those polled are concerned about improving productivity.

54 percent want the innovation incentives broadened to include a wider definition of innovation and to encompass more automation and training activities. Among SMEs, 40 percent of those polled admitted to using productivity-related tax incentives for defraying operating expenses rather than raising productivity.

44 percent of all Singapore companies have plans to expand their regional presence over the next 3 years, signalling the importance of focusing on building the Singapore brand.

The KPMG pre-Budget poll findings suggest that different businesses in the economy have significantly different needs, and there is no one-size-fits-all approach to productivity. At the same time, there is an inadequate focus on increasing innovation as a driver for economic growth.

Mr Tay Hong Beng, Head of Tax at KPMG in Singapore, says: "Looking ahead even as Singapore celebrates 50 years as a nation, developing more Singapore-based companies that can compete globally at the higher end of the value chain should become a priority.

Taking stock five years after the launch of the Productivity and Innovation Credit (PIC) scheme, it is time to recalibrate it. "We need to recognise that businesses at different stages of growth have differing needs. For example, younger businesses need more help with automation and training, while more mature businesses need to be more innovative to realise higher productivity gains."

Instilling ‘heart-ware’ for productivity and innovation schemes

Over the past 5 years, productivity levels have stagnated even with all the best efforts to make an economic transformation. The uncertain global economic outlook now compounds the strain. Moving from productivity to a greater focus on innovation may be helpful to drive economic growth.

Mr Victor Mills, Chief Executive, SICC said, "Productivity remains elusive. Companies are clearly struggling with how productivity can be achieved. This is a great opportunity for knowledge transfer from large companies to help our SMEs. The report confirms what we have long suspected: that PIC grants are being used to buy hardware rather than to move the productivity dial in the right direction."

However, the drive for innovation seems to have become mired in complexity, and 54 percent want existing incentives reviewed to improve relevance and accessibility. Current incentive frameworks may not sufficiently provide enough encouragement to companies.

Mr Tay added, "Productivity provides only limited competitive advantage. That is, up until all competitors reach parity. Over the longer term, it is innovation that raises productivity. Our long-run economic performance relies on the level and quality of our innovation activities. We need new products that command higher value, new processes that are more efficient or new business models that change both."

Mr Melvin Yong, General Manager - Singapore, CPA Australia said, "Companies have traditionally pursued productivity initiatives by investing more in product development and IT, but these need to be supported by education and talent management. Current productivity and innovation schemes are too focused on ‘hardware’ and not enough on ‘heart-ware’. No amount of skill or technology will help workers excel if they do not believe in the common cause and are resistant to change."

Nurturing the next generation of home-grown brands

Poll respondents also indicated an urgent need for more support to Singapore companies expanding regionally. Almost half of the respondents (49 percent) wanted more grants and financing assistance to assess and develop market opportunities.

This is especially urgent given the implementation of the ASEAN Economic Community this year and the opportunities it brings to Singapore enterprises.

Specifically, more support for more branding initiatives and other value-creation activities would be helpful. With more than one-third (44 percent) of Singapore businesses planning to enlarge their regional presence, more should be done to recognise and promote stronger Singapore brands as ambassadors overseas.

Mr Ang Yuit, Vice-President, Membership & Training, Business Feedback Group, ASME, said "Current incentives do not go far enough to recognise the intangible nature of efforts to create a strong brand. More incentives and tax allowances to recognise homegrown, internally-generated brands could be one way to recognise those businesses that have contributed to Singapore economy and provide inspiration to other Singapore enterprises."

Calls for less complex business regulations amid economic uncertainty

The poll suggests that the global economic uncertainty is a key concern. Almost half of all respondents cited the global economic instability as posing a threat to their businesses, particularly SMEs. This factor rose, from being of lower concern in our Pre-Budget 2014 survey, to becoming the leading cause of worry this year.

Many respondents also felt that the Government agencies had to be more business-centric – less broad-brushed and understand the unique needs of each industry. The top wishes for businesses were less complex business regulations and simplified incentive rules.

"Companies find the existing incentives administratively cumbersome and inadequately accessible. As more companies globalise and earn a larger share of their income from overseas operations, this will increasingly be a problem. Simplifying the existing regulatory environment will increase the effectiveness of current and future policies aimed at restructuring the economy," said Mr Tay.